Bank of Canada swerves in ‘game of chicken’ with inflation: What economists say

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The Bank of Canada surprised markets with a 50-basis point hike in its Oct. 26 rate decision, a smaller move than the 75-point hike many economists were anticipating. Its trend-setting policy rate now stands at 3.75 per cent.

The Bank acknowledged that while inflation is off its peak, it still remains too high. In the accompanying monetary policy report, the central bank is now expecting inflation to cool to three per cent in late 2023 before returning to the two per cent target by 2024.

Here is what economists say about the surprise move:

Royce Mendes, managing director and head of macro strategy at Desjardins

“In the Bank of Canada’s game of chicken with inflation, central bankers were the first to swerve… The fact that core inflation hasn’t slowed, inflation expectations remain elevated and demand is still outrunning supply, the Bank could have easily justified a larger rate hike. That said, the risk of such an aggressive move apparently outweighed the reward.”

“As we’ve long said, the Canadian central bank needed to pivot before its U.S. counterpart as a result of the interest-rate sensitivity of the Canadian economy. While the statement leaves open the door to the possibility of another 50-basis-point move in December, expected economic underperformance will likely limit the next hike to only 25 basis points.”

Andrew Grantham, senior economist, CIBC Capital Markets

“The Bank of Canada continued hiking interest rates in an effort to bring inflation back under control, although the 50-basis-point move, to take the overnight rate to 3.75 per cent, was a little less aggressive than the consensus and market had expected (75 basis points was almost fully priced in). The statement and downgraded growth forecasts within the MPR hint at an economy that is losing momentum maybe a little quicker than previously anticipated.”

“However, even with the weaker growth profile, the Bank stated that its preferred measures of inflation are not yet showing meaningful evidence of easing, and as such the statement still suggested that interest rates ‘will need to rise further.’ As such, this may just represent a slightly slower path to the same peak interest rate (4.25 per cent) that we had forecast prior to today’s smaller than anticipated 50-basis-point hike.”

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Stephen Tapp, chief economist, Canadian Chamber of Commerce

“I expect the markets will move quickly today to price in a 25-basis-point hike by the Bank of Canada in December, which would take the policy rate to 4 per cent, at which point the Bank can take a breather and wait to see whether core and expected inflation are coming back closer to the 2 per cent target.

Veronica Clark, economist, Citi

“While it was a close call between a 50-basis point hike or a 75-basis point hike at today’s meeting, in the end the (Bank of Canada) delivered a hawkish 50 basis point increase as was our expectation. Guidance also remains that rates are still likely to rise further, with no explicit indication of how high the level of policy rates might reach.

“We continue to expect another 50-basis point hike in December with a pause in January at 4.25 per cent, although with risks still tilted towards higher policy rates.”

Charles St-Arnaud, chief economist, Alberta Central

“The key message in today’s decision is that the central bank remains committed to fighting inflation and is not yet done hiking interest rates. However, the (Bank of Canada) also signals that the pace of hikes will slow and that the amount of hikes required is becoming more data-dependent.”

“Today’s decision supports our view that the (Bank of Canada) will continue hiking. As such, we believe that interest rates will likely increase by another 25 basis points at the December meeting. However, the risk is that they could increase by more if inflation does not show further signs of abating.”

Josh Nye, senior economist, RBC Economics

“Today’s dovish pivot supports our view that the (Bank of Canada) will continue to taper its tightening cycle into year end with a 25-basis point increase in December leaving the terminal rate at 4 per cent. Risks around that forecast are still skewed to the upside—indeed, Macklem seemed to frame next meeting’s debate as 25 vs. 50 basis points—and we think the (Bank of Canada) will want to see further easing in monthly core inflation measures and inflation expectations to pause at 4 per cent.”

Simon Harvey, head of FX Analysis, Monex

“Despite the downshift from September’s 75-basis point hike, 50 basis points is still a hawkish move in the broader historical context, where 25 basis point-sized moves was the norm.”

“We now expect another downshift to 25 basis points in December before a pause to wait and see how the data evolves, which would bring the overnight rate to 4 per cent by year-end.”

• Email: shughes@postmedia.com | Twitter:

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